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Interest Only Loans Vs. Fully Amortized Loans

A woman wearing a yellow sweater researches Interest Only Loans (IO) and considers them for their lower payments.

Borrowers often ask for “Interest Only” (IO) loans b/c they want lower mortgage payments, and we discourage them for a variety of reasons.

I am discussing the pros and cons today.


  1. Payment Flexibility: Borrowers with cyclical income want lower payments during slower times (assuming payments really are lower – see below).
  2. Higher Investment Returns Elsewhere: If borrowers are earning high returns on their money, they often don’t want to sink those funds into their principal balance.
  3. Want to Pay Off Debts Post-Inflation: Some borrowers do not want to pay down any debts now b/c they are convinced inflation will set in at some point, allowing them to pay off debts later with much more abundant and less valuable dollars.


  1. ARMs Only: Most IO loans are only available with Adjustable Rate Mortgages (ARMs), so IO borrowers are not able to lock in historically low fixed rates.
  2. Harder to Qualify For: IO loans are harder to qualify for, requiring near-perfect credit, ample reserves, low debt ratios and higher down payments.
  3. Higher Down Payment: This is somewhat redundant to the above item, but most IO loans require at least a 25% down payment.
  4. Don’t Build Equity: While equity is slow to build at first with all fully amortized loans, after the 5-year mark equity starts to build much faster than most borrowers realize; fully amortized loans are really sort of a forced savings plan that borrowers don’t even realize they are paying into.
  5. Hard to Find in Post-COVID Era: This is a huge factor right now, as most mortgage lenders don’t even offer IO loans b/c there is no market for them.
  6. IO LOANS HAVE HIGHER RATES: This is the biggest factor of all. IO loans almost always have much higher rates, eliminating much of the advantage of taking an IO loan in the first place. For a $600,000 loan, for example, a borrower might save $500 per month by taking an IO loan, but her rate could also be 1% higher, costing her an additional $6,000 per year in interest (offsetting the lower payment entirely).

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

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